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Corporate treasurers: is it time you hedged climate risk?

Two recent news stories suggest that treasury professionals should be seriously considering the impact of climate change risks – and incorporating these risks into their financial risk framework.

It seems obvious, but climate change and finance aren't as separate as we might have thought. The destabilisation of our weather systems and increasing global temperatures are creating risks for business (such as risks to infrastructure and property, or changing asset or commodity prices). It's true that the topic of climate change rarely enters into the daily treasury operations of cash management or forecasting. But two recent news stories might lead us to think that financial professionals everywhere need to sit up and realise the impact that climate change is having on the financial world.

Climate risk should be reflected in CMU

The first story is that investors have called on EU regulators to place more importance on climate risk as part of the European Commission's Capital Markets Union (CMU) initiative. Euractiv reports that the group of investors and pensions funds, the Institutional Investors Group on Climate Change (IIGCC), which manage assets worth more than €13 trillion, is calling for a transition to a low-carbon economy. The IIGCC said that: “Financial regulation needs to enable and facilitate the changes occurring in the real economy... Climate risk needs to be better reflected in the price of risk so that a shift in capital can be encouraged.”

This news story reports on a policy paper published by the IIGCC on 20 September, which states that global warming poses a systemic risk to global financial stability. Improving the pricing of risk: Aligning the EU financial system and climate change states the case for fostering “a financial system that encompasses time horizons capable of dealing with the challenge of climate change and price risk appropriately.”

One of the IIGCC's key recommendations is a standard disclosure regime for companies to report on their green policies so that fund managers can assess their exposure to climate risk. Strict climate risk disclosure methods are also part of a G20 proposal, the Task Force on Climate-related Financial Disclosures.

Oil company accused of “hiding knowledge of climate change risks” from investors

And in the second news story, Bloomberg recently reported that Exxon Mobil Corp is being investigated by the New York Attorney General over whether the oil firm hid its knowledge of how climate change risks could impact its investors. The inquiry relates to whether the oil giant “knew decades ago about the dangers of climate change and failed to alert investors to the financial risks it could pose to the world’s biggest oil explorer by market value”, Bloomberg reports.

New York Attorney General Eric Schneiderman is looking into whether Exxon “misled investors by hiding how climate change may affect the company’s finances, burying internal reports that warned global warming would damage the US economy and the company’s assets”.

CTMfile take: The Bloomberg article concludes with an amusing mention of a Texas Republican representative, Lamar Smith, who has said that “Schneiderman’s investigation poses a risk to the free speech of scientists who disagree that humans are causing the climate to change.” It may well be that some scientists disagree with the vast majority of those that accept the convincing evidence of human-caused climate change. Treasury professionals, however, would be advised to “go with it” and start planning on how to incorporate the financial risks of climate change within their financial risk framework.

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